Proposed Regulations on Deemed IRAs
Rev. 06/05/03, E-mail Alert 2003-10

Link to Final Regulations for Deemed IRAs

On May 20, 2003 the IRS issued proposed regulations on the addition of deemed IRAs to qualified retirement plans. The regulations reinforce Rev. Proc. 2003-13, which requires the inclusion of deemed IRA provisions in plan documents. Deemed IRAs are an optional plan provision that may be made available as either a traditional IRA or a Roth IRA. The regulations support the principal that the deemed IRA must operate under the IRA rules and the qualified plan operate as a qualified plan. The proposed regulations provide the following guidance:

IRA Contributions

• The deadline for deemed IRA contributions is the April 15th of the year following the year for which the contribution is made. No contributions for the prior year will be accepted after April 15th.
  
• Contributions may be made by payroll deduction.
  
• IRA Rollovers and transfers to and from deemed IRAs may generally be made.
  
• The surviving spouse of a deceased participant may elect to treat the deemed IRA as their own for tax purposes. However, the surviving spouse may not contribute to the deemed IRA because such contribution may be made only by an employee.

Distributions

• Required minimum distributions on a traditional deemed IRA must begin by April 1 of the year after 70½ is attained. This follows the traditional IRA rules rather than the qualified plan rule that allows non-5%-owners to defer until actual retirement if it is later than age 70½. The Roth version of the deemed IRA is not subject to the required minimum distribution requirements.
  
• Deemed traditional IRA distributions made due to early retirement between age 55 and before age 59½ remain subject to the 10% premature distribution penalty and are not eligible for the qualified plan exception for early retirement at age 55.
  
• The substantially equal payment early distribution exception of 72(t) is applied separately to amounts distributed from the deemed IRA and the qualified plan accounts. This means that the substantially equal payment amounts will also be determined separately.

IRS Required IRA Trustee or Custodian

• The Deemed IRA portion of the qualified plan must follow the regular IRA rules that require the Trustee or Custodian of IRA assets to be a bank or IRS-approved Trustee or Custodian. Therefore, deemed IRAs cannot be self-trusteed.

IRA Trust

• A separate trust may be established for each deemed IRA or all deemed IRAs may be held in a single trust provided the separate trust is apart from the trust that contains the qualified plan assets.

Commingling of IRA and Qualified Plan Assets

• All of the deemed IRAs' assets may be held in one trust. However, the IRA trust must be a separate trust from the qualified plan assets.
  
• Section 408(q) expressly provides that the assets of the deemed IRA trust and the qualified plan may be commingled for investment purposes. This is an exception to the IRA rule that does not allow commingling of IRA assets with qualified plan assets.

Disqualification Caveats

• If any deemed IRA within the qualified fails to follow the IRA rules, the entire qualified plan may be disqualified. If the qualified plan is disqualified, the deemed IRAs may be treated as regular IRAs. However, if the deemed IRA assets were commingled with the qualified plan assets, then upon a qualified plan disqualification, the deemed IRAs would also be disqualified.
  
• Qualification errors involving deemed IRAs may be corrected under the IRS Employee Plans Compliance Resolution Program.

Availability of the deemed IRA is not a benefit, right or feature

• Deemed IRAs may be made available on a discriminatory basis that favors highly compensated employees.

The proposed effective date for the regulations is August 1, 2003.

Bill Grossman, QPA